How to create an exit strategy for your tech startup

Nick Jones, partner and head of technology at Cavendish Corporate Finance, which advises exclusively on sell side M&A to mid-market companies, explains how startups can create a decent exit strategy.

Preparing to sell your business is a lengthy and complex process. Getting the timing right for the sale of a business represents one of the key factors to achieve the best price on sale.

Rather than rush for the exit, business owners should start planning well in advance of a sale to get the best deal.

Selling is all about crystallising the value a business owner has created and has the principal benefit of de-risking the shareholders away from what is often their main asset. This comes at the price of exiting a business that the owner has control and intimate knowledge of with then a need to reinvest the proceeds in other asset classes where the seller perhaps has less knowledge and less control.

It is important that business owners recognise that the value of a business is not based on what they think it is worth, but on what the markets will pay for it. That is why choosing to sell a business at a time when the particular sector in which the business operates is performing well will make a business more desirable to potential buyers and boost potential sale value.

Planning

When first setting up a company, it is always wise to have also planned the exit. If from the outset a management team has decided on what type of buyer will give them the best value on exit, say a trade or financial buyer, they can then grow the business in the most appropriate way to make the business as attractive as possible for this type of buyer.

In the initial stages, start-ups will be focused on getting the business strategy right to attract the type of buyer they want. As the company grows and matures, more detailed planning will be needed as the moment of exit nears. This should cover the following areas:

– Making sure all shareholders are aligned and agree with the sale process by drawing up a shareholder agreement in order to avoid any conflict during the sale process.

– Ensuring a tried and tested management team is in place, and is well incentivised to drive the business through a clearly articulated growth plan.

– Having a strong finance team and FD in place to be able to provide potential buyers will the financial and business information they need

– Checking that all of the legal due diligence has been completed and steps have been taken to protect the IP, to avoid any deficiency in patent or other IP registrations, which can act as a powerful deterrent and a potential deal breaker. Entrepreneurs should consider having NEDs who have knowledge of building successful technology businesses and preferably with a track record of good exits.

Maximising value

Business owners approaching exit stage should have a clear focus on making their business as attractive as possible to their target buyers.

They should monitor the performance and activity of these potential buyers to assess any new business lines they may be pursuing or geographic markets that they are expanding to, so the company looking to exit can position itself in the best possible way to show it can help and enhance the value of the target buyers.

Establishing an honest but compelling growth forecast that can be backed up with strong evidence of previous milestones that have been achieved is also a key factor. Potential buyers like to see both successful past growth, but also that there is still strong potential for the business to expand further. Solid, predictable growth is attractive to a buyer.

Establishing what the key value drivers of valuation are for the identified buyers is important. Often for technology businesses, revenue growth is more important to buyers than profits – the answer will determine key decisions for investment in a business as it approaches exit.

Minimising distractions

Having a plan in place will minimise the time needed to be spent on exit, and will ensure there are as few issues as possible, and that the sale goes smoothly.

Also, it is critical to have a depth of management team that can help ensure all aspects of the sale can be handled, and not be a distraction from the core operating business. This may require, for example, bolstering the finance or legal function to ensure all the detailed information potential buyers require can be easily supplied.

Despite this, it is easy for owners to become distracted, especially when potential suitors approach the business, sometimes with flattering valuations that can quickly turn to fishing expeditions.

To support the management team, avoid wasted resources and create the best competitive situation to maximise the value, it is also wise to appoint external advisers early.